Federal taxes on inherited money: the short answer

You do not owe federal income tax on money or property you inherit. The person who died may have owed estate tax before the money reached you, but that is not your tax bill—it comes from the estate itself. Once the inheritance lands in your account, it is yours to keep without reporting it as income on your federal tax return.

This rule applies whether you inherit cash, a house, stocks, or a car. The IRS does not tax the transfer itself. However, what you do with that inheritance after you receive it can create tax obligations. If inherited money sits in a savings account and earns interest, you owe tax on that interest. If you inherit rental property and collect rent, that rent is taxable income. The inheritance itself is not; the earnings from it are.

Key Takeaways

  • Inherited money is not reported as income on your federal tax return and carries no federal income tax.
  • The estate of the person who died may have owed estate tax, but you do not inherit that debt unless you are the executor or spouse.
  • Interest, dividends, and rent earned from inherited assets after you receive them are taxable to you.
  • Some states impose an inheritance tax, which varies by state and by your relationship to the person who died.
  • If you inherit a retirement account like an IRA, you will owe income tax when you withdraw the money, even though the inheritance itself was not taxed.

When the estate itself owes tax

The estate—the total value of everything the person left behind—may owe federal estate tax before any money is distributed to heirs. This happens only if the estate is very large. For deaths in 2024, federal estate tax applies only to estates worth more than $13.61 million. Most estates fall well below this threshold and owe nothing.

If the estate does owe tax, the executor (the person managing the estate) pays it from estate assets before distributing money to heirs. You do not receive a bill for it. The executor files Form 706, the estate tax return, with the IRS. Once that tax is paid, the remaining money goes to you and other heirs without any income tax attached to it.

The only exception is if you are the surviving spouse. In that case, you may be able to use the unused portion of your spouse's estate tax exemption, which can reduce or eliminate estate tax. This is a complex calculation, and the executor or an estate attorney should handle it.

State inheritance taxes and who pays them

Twelve states and the District of Columbia have an inheritance tax or estate tax separate from the federal tax. These are: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, Delaware, Connecticut, Illinois, Maine, Massachusetts, Minnesota, Oregon, Rhode Island, Vermont, and Washington. The rules and rates vary by state.

In states with an inheritance tax, the amount you owe depends on your relationship to the person who died. Spouses and children often owe nothing or a reduced rate. More distant relatives and unrelated people pay higher rates or are taxed on the full amount. You will receive a notice from the state if you owe; the executor may also inform you. Check your state's department of revenue website if you are unsure whether your state has this tax.

Inherited retirement accounts and the tax you will owe later

Inheriting a retirement account like a traditional IRA, 401(k), or 403(b) is different from inheriting cash or property. You do not owe tax when you inherit the account, but you will owe income tax when you withdraw the money. The tax is based on how much you withdraw and your tax bracket that year.

The rules for how long you can hold the money before withdrawing it changed in 2023. If you inherit an IRA from someone who was not your spouse, you generally must withdraw all the money within 10 years. If you inherit a 401(k), your employer's plan rules determine the timeline. Withdrawals are taxed as ordinary income. If you inherit a Roth IRA, the rules are different—withdrawals may be tax-free if the account was open long enough, but you still must follow the withdrawal timeline.

If you are unsure about the withdrawal rules for your specific account, contact the financial institution that holds it. They can tell you the important date and help you understand the tax impact of each withdrawal.

Inherited property and ongoing tax obligations

When you inherit real estate, you do not owe income tax on the property itself. However, you may owe property tax to your county or municipality, and that bill continues whether you live in the house or rent it out. You also receive a "stepped-up basis," which means the property's value for tax purposes is reset to what it was worth on the date of death, not what the original owner paid for it. This can reduce capital gains tax if you sell the property later.

If you rent out inherited property, the rent you collect is taxable income. You can deduct expenses like mortgage interest, property tax, insurance, repairs, and maintenance. If you live in the house yourself, you owe no income tax on it, but you still owe property tax.

Inherited investments and capital gains

When you inherit stocks, bonds, mutual funds, or other investments, you receive the same stepped-up basis as with real estate. This means the cost basis—the value used to calculate gain or loss—is reset to the market value on the date of death. If the stock was worth $50 per share when the person died and you sell it for $55 per share a month later, you owe tax on only the $5 gain, not on the entire $55.

Without the stepped-up basis, you would owe tax on all the gains that happened before you inherited it. This is a significant tax advantage. Keep records of the value on the date of death; your broker or the estate documents should provide this information. When you sell, report the sale on Schedule D of your tax return and calculate the gain using the stepped-up basis as your starting point.

What to do if you inherit money

After you receive an inheritance, do not rush to move the money. Let it sit in a money market account or savings account for a few weeks while you understand what you inherited and what tax obligations come with it. If the estate is complex or the inheritance is large, consider meeting with a tax professional or estate attorney before making any moves.

If you inherited a retirement account, contact the financial institution when ready. They will explain the withdrawal rules and timeline specific to your account. If you inherited real estate, contact your county assessor's office to understand your property tax obligations. If you inherited investments, ask your broker or the estate executor for the stepped-up basis values so you have them when you eventually sell.

Keep all documents related to the inheritance: the will, the death certificate, the estate settlement statement, and any valuations provided by the executor. These documents protect you if the IRS ever questions your tax reporting.

Frequently Asked Questions

Do I have to report an inheritance on my tax return?

No. You do not report the inheritance itself as income on your federal tax return. However, if the inheritance includes a retirement account or generates income (interest, dividends, rent), you report that income in the year you receive it.

What if I inherit money from someone who lived in another country?

U.S. federal income tax rules are the same—you owe no federal income tax on the inheritance. However, if the person who died was not a U.S. citizen, the estate may owe a different tax rate. Consult a tax professional or estate attorney, as international inheritance rules are complex.

Can I owe taxes on an inheritance if the person who died owed taxes?

No. You do not inherit someone else's tax debt. The estate pays any taxes owed by the person who died before distributing money to heirs. If the estate does not have enough money to pay the taxes, creditors may make claims against the estate, which could reduce your inheritance, but you do not receive a personal tax bill.

Do I owe tax on inherited life insurance proceeds?

No. Life insurance proceeds paid to a named beneficiary are not taxable income. However, if the insurance payout is made to the estate rather than to you directly, the estate may owe estate tax if the total estate is large enough.

What is the stepped-up basis and why does it matter?

The stepped-up basis resets the cost value of inherited property to its market value on the date of death. This means if you inherit a house worth $300,000 and sell it for $310,000 a year later, you owe tax on only the $10,000 gain, not on years of appreciation the original owner experienced.